On March 14, Joseph Stiglitz, professor of economics at Columbia University and Nobel laureate, came to Japan to give a presentation at the Council for Economic and Fiscal Policy of the Japanese government. It was attended by Prime Minister Shizo Abe and other key government ministers.

The content and timing are intriguing. Against the background that the Prime Minster and his close associates are pushing for more fiscal policy, Professor Stiglitz warns against the danger of another consumption tax hike. It was only last March when he said just this in front of Prime Minister Abe.

This time, he focuses on another aspect of Japan’s current macroeconomic policy mix. He calls for “cancelling government debt owned by government [BOJ]” which would result in “overnight reduction in gross government debt—allaying some anxieties.” (page 15 of his slides).

As of March 2017, the Bank of Japan has purchased 379 trillion yen worth of long-term JGBs. Therefore, if we combine the government balance sheet and the BOJ balance sheet together, Japan’s net debt would shrink to around 600 trillion yen from 1,000 trillion yen. By the way, this does not take into account existing government assets of about 670 trillion yen.

Seen in this light, there is very little to worry about Japan’s fiscal situation. Announcing this fact would reduce public fear about the fiscal situation.

I agree with most of what Stiglitz said about macroeconomic policy and the need for fiscal policy, but I must say I am baffled by his favorable view on Japan’s industrial policy.

Within his presentation, he calls for a “new industrial policy for the twenty-first century” (page 7 of his slides). Basically, he claims three points. First, “industrial policies worked in the past” which made “Japan’s strong growth in earlier era” possible. Second, it “can be made to work again—adapted to 21st century.” Here the key is “industry-government cooperation” with “greater involvement of academia and research institutes.” Third, “industrial policy needs to focus on other central issues of 21st century” such as global warming and an aging population.

At least on the first two of three points, I must disagree. For the first point, there is now a widespread and robust academic consensus that industrial policy did not work in the past in Japan.

For example, Richard Beason and David Weinstein examines the contribution of industrial policy to the productivity growth from 1955 to 1990 in their classic paper (“Growth, Economies of Scale, and Targeting in Japan (1955-1990)” Review of Economics and Statistics, Vol.78, No.2, 1996, pp. 286-295). They conclude that “in the Japanese case, resources were not diverted to the high growth industries.” This might be due to the authorities’ failure to pick up growth industries. Or they intended to support declining industries, not growing industries in the first place. However, the “most important conclusion is that targeting did not positively affect the factor productivities of the industries considered in this study.”

Other studies on specific sectors have reached a similar conclusion. None other than Paul Krugman has argued about three decades ago that subsidized loans and special tax breaks for the steel industry did not make the industry more profitable, and there was no other benefits to other parts of the economy (Krugman, Paul R., “Targeted Industrial Policies: Theory and Evidence,” in Dominick Salvatore ed., The New Protectionist Threat to World Welfare, North-Holland, 1987).

More recent study has reached the same conclusion. Hiroshi Ohashi, professor of economics at the University of Tokyo, investigates the effects of export subsidy on Japan’s steel industry, concluding that “the Japanese subsidy policy had only a negligible impact on industry growth. The engine of the Japanese steel miracle was autonomously driven by market mechanisms. This finding implied that the policy did not contribute much to Japanese economic growth as a whole” (Ohashi, Hiroshi, “Learning by Doing, Export Subsidies, and Industry Growth: Japanese Steel in the 1950s and 1960s,” Journal of International Economics, Vol.66, Issue 2, pp.297–323).

The concluding remarks of David Flath’s standard textbook on the Japanese economy are worth quoting in full.

“The famous reputation of Japanese industrial policy owes much to the fact that the years before liberalization of foreign trade in the mid-1960s stripped MITI of some of its powers coincided exactly with the onset of Japan’s remarkable postwar economic recovery. Yet the industries most favored by Japanese industrial policy prior to 1964—coal mining, steel, electric power, and shipbuilding—contributed relatively less to high growth than did other, other, less favored, industries” (David Flath, The Japanese Economy, Third Edition, Oxford University Press, 2014, p.229).

If industrial policies did not work in the past, there is less reason to believe that they will work now. Suffice it to say that Japan’s “industry-government cooperation” did not produce a Silicon valley.

I must hasten to add that what Professor Stiglitz means by "industrial policies" is really quite broad, perhaps too broad. No economists would deny support for basic research and development, education and investment in public infrastructure. But they should not be confused with industrial policies.

I am a professor of economics at Waseda University and a visiting fellow at the Center on Japanese Economy and Business at Columbia Business School.